Lehman collapse is a price Wall Street is prepared to pay

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By Tracy Corrigan

What will Wall Street and the City of London look like, when the smoke clears?

The collapse of Lehman Brothers and the rescue of Merrill Lynch at the weekend do not mark the end of the financial crisis. There may still be more failures to come – former US Federal Reserve chairman Alan Greenspan, hardly known for his pessimism, suspects there will be.

But the fate of Lehman and Merrill, coupled with the refusal of the US government to provide further financial underpinning, have helped define the likely shape of the post-crisis financial world.

For one thing, power will no longer rest with the great Wall Street investment banks, which once pulled the levers of corporate America, even though their financial firepower was dwarfed by the commercial banks’.

Only Goldman Sachs and Morgan Stanley remain forces to be reckoned with, now that Lehman is gone and Merrill and Bear Stearns subsumed into much larger entities, Does that matter? In practical terms, not really: their functions – trading and underwriting debt and equity, advising companies on mergers – are already provided by big global banks such as Citigroup, Credit Suisse and Barclays.

 

These commercial banks, all partially financed by retail depositors’ money, have been encroaching on traditional investment banking territory for at least the last twenty years, as US legislation, designed to separate “risky” activities such as trading from deposit-taking, has been progressively abandoned.

Big commercial banks have bought the likes of Salomon Brothers in the US, and in the City, the prestigious old names of SG Warburg and Kleinwort Benson were swallowed up long ago. Commercial banks will be keen to pick up any slack, stretched balance sheets permitting.

There is, however, likely to be a big cultural shift for those still working in the City and on Wall Street when the dust finally settles.

US investment banking culture has been the defining influence on both sides of the Atlantic in recent years. The rapid growth of financial services in the City was driven by Goldman, Merrill, Lehman and others, which built up a huge presence in the 1980s and 1990s.

Some old-timers still bemoan the disappearance of a clubbier, more traditional City, where a man’s word was his bond and lunch lasted three hours. But the US investment banks also brought a more meritocratic approach to staffing, by paying more attention to employees’ productivity and less to their old school tie.

In the process, though, they revved up a bonus culture which encouraged traders to focus on short-term profits, and is undoubtedly partly to blame for some of the excesses which led to the current financial crisis.

The big commercial banks tend not to nurture “stars” (admittedly, I can think of a few executives who don’t seem to have been told this). They are, some would say, greyer and more bureaucratic, though their reputation for conservatism has rather been shot to pieces by the subprime mortgage fall-out.

The environment for surviving investment banks is likely to remain tough, even when market conditions improve. Financing costs will stay high, given their riskier profile, and they still face a regulatory backlash.

But this weekend’s decision by Hank Paulson, the US Treasury secretary, not to provide further government backing for financial institutions means that, despite the immediate drama, change is likely to be less radical than it might have been in the longer term.

Until this weekend, it looked as if the US government might carry on underwriting risk for the financial services industry, following the help it provided Bear Stearns and the effective nationalisation of mortgage providers Fannie Mae and Freddie Mac.

For the tax payer to continue taking on such risk would have required a massive regulatory overhaul, ranging from the capping of salaries to onerous capital requirements. Whatever the pain in the short term, those left standing on Wall Street and in the City did not want that to happen.

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    Bermuda-Based Lehman Re Downgraded

    CaribWorldNews, NEW YORK, NY, Weds. Sept. 17, 2008: Bermuda-based reinsurer, Lehman Re Limited has been downgraded by A.M. Best, the independent insurance rating agency.

    A.M. Best yesterday downgraded the financial strength rating and issuer credit rating to `bb` (good), from `a-` (excellent), of the company, a wholly owned reinsurance subsidiary of the investment bank Lehman Brothers Holding Inc.

    The rating slide came a day after Lehman Brothers declared bankruptcy. Lehman Re is a wholly owned reinsurance subsidiary of Lehman Brothers Holding Inc. (Lehman Brothers), and the decision of Lehman Brothers to petition for Chapter 11 bankruptcy protection has prompted these rating actions, A.M. Best said.

    `While Lehman Re is not included in the bankruptcy petition, A.M. Best believes that the pending reorganization of Lehman Brothers could have a significant adverse impact on Lehman Re,` analysts said in a statement. `

    A.M. Best had expected that the balance sheet of Lehman Brothers would be a source of capital for Lehman Re, if needed. A.M. Best also is concerned about the future of ongoing operating ties such as the securities activity between Lehman Re and other Lehman Brothers’ affiliates, the administrative and investment management services provided to Lehman Re by other subsidiaries of Lehman Brothers and the inability of Lehman Brothers to refer potential insurance clients to Lehman Re.`

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    Bahamas Press is locked on this worldwide global economic story of Lehman Brothers, the 10th major bank in the United States to go under. We know from experience, “ECONOMIC” issues are not friendliest topics in the Bahamian vernacular. However it is important to inform and let Bahamians know that the world, just waters around them, are crumbling. Fewer tourist will be coming to The Bahamas or taking vacations period. More and more workers will become unemployed in and around the tourism sector. Which trickle to more BEC consumers being turned off and Bahamians having greater difficulty buying food and gas.

    This is the fallout of this latest tremor on Wall Street and around the world. Many of those workers fired today, have vacation homes here in The Bahamas and yes, many others today they have lost their entire investment portfolios.

    It all means we must become more CONSERVATIVE in our spending. But knowing how many of us (BAHAMIANS) simply live for today, the stuff would have to hit the fan before we do. Bahamas Press rather not talk about some imaginary story of a tornado like ZNS did tonight, but talk about the GLOBAL FINANCIAL COLLAPSE. And this is nonfiction, it is as real as waking up tomorrow morning and hearing that your entire savings are all gone! That is exactly what so many American realized today upon hearing the news of Lehman Brothers, Merrill Lynch and AIG.

    Bahamas Press/ Editor